Payday Loan Companies Exploit Low-Income Americans For Billions

Low-income Americans, up to 12 million of them, are taking out high-interest payday loans to cover everyday living expenses.

Payday loans provide individuals with a two-week advance on their paycheck or other income source, such as a welfare or social security payment. This meets the consumer’s immediate financial need, but interest rates on payday loans are exorbitant, frequently putting borrowers further in debt.

“These products may become harmful for consumers when they are used to make up for chronic cash flow shortages,” the Consumer Financial Protection Bureau stated in a report.

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Though some states disallow these loan practices, the largely unregulated payday industry can bypass state interest rate regulations by offering its services via the Internet.

While the CFPB is working to protect consumers from financial harm, conservatives often claim the U.S. would gain new wealth if government controls would “just get out of the way.” This rings true for payday loan companies who charge consumers about $15 for a two-week loan on each $100 borrowed. That tallies to an annual interest rate of 391 percent.

The CFPB noted in its report that the average payday borrower will owe fees totaling $458 to borrow $350.

A Pew survey found such practices amounted to a $7.4 billion interest rate and loan windfall for payday companies in 2012.

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According to payday industry’s lobbying group Financial Service Centers of America, blame for costly consumer loans belongs to traditional banks that offer limited financial options to low-income individuals and neighborhoods. While that seems a bit like the pot calling the kettle black, a CNBC report revealed that some mainstream banks actually offer payday loans.

The Center for Responsible Lending reports that Fifth Third Bank, Wells Fargo and U.S. Bank offer payday loans -- at rates averaging 225 to 300 percent.

“The sweet pot [for lenders] is somebody who is struggling to pay their regular living expenses, but somebody who can afford to pay the fee every two seeks,” said Pew researcher Nick Bourke. “That’s where they make their money.”